OREANDA-NEWS. January 20, 2016. Fitch Ratings views Citigroup's (Citi) earnings performance in the fourth quarter of 2015 (4Q'15) as disappointing, but the full-year's results were in line with the agency's expectations. Citi reported a 0.77% return on assets (ROA) in the fourth quarter of 2015 (4Q'15) and 0.94% for the full-year. Results for the full-year were within the company's target of 90bps to 110bps.

Performance in 4Q'15 fell considerably on a linked-quarter basis, declining 14bps primarily due to higher energy-related credit costs, challenging fixed income markets, and higher linked-quarter repositioning costs. The quarter's results also reflected the gain on the sale of OneMain Financial, as well as sales of Japan's retail and card businesses, which were offset by a significant amount of non-TLAC eligible debt buybacks.

Bottom line results in 2015 benefitted from much lower legal and repositioning charges, which fell \\$4.8 billion for the year. Citi expects its ROA will remain above 90bps in 2016.

CVA/DVA losses were \\$181 million pre-tax losses in 4Q'15, as compared to \\$196 million in pre-tax gains last quarter. Excluding these CVA/DVA, fourth quarter revenues, increased 1% on a sequential basis, in constant dollars excluding the impact of foreign exchange translation into U.S. dollars.

The impact of foreign exchange translation into U.S. dollars can impact financial reporting and had a large impact again this quarter relative to a year ago. Citi hedges its CET1 exposure to fluctuations in currencies; however, foreign exchange translations still impacted the CET1 ratio by 8bps as compared to a year ago.

Results in International Consumer Banking were lower for the quarter and for the year due to spread compression in cards, lower investment sales revenues, as well as the ongoing challenge of regulatory changes in Asia and Mexico. In addition to revenue challenges, Citi reported expense growth resulting in negative operating leverage during the quarter from a year ago and last quarter.

North American Consumer Banking revenues were flat on a linked-quarter basis, and fell 6% from a year ago reflecting a gain on a sale year ago, as well as contra-revenues items related to new customer account acquisitions and card rewards. Quarterly expenses ticked up 4% on a sequential basis, but declined 6% from a year ago given lower repositioning expenses and efficiency initiatives. Even with branch closures in selected markets across the U.S., Citi is retaining 50% of deposits, and is also supportive of an even greater push into digital and mobile banking.

In terms of the Institutional segment, fixed income revenues declined 14% sequentially but were up 7% from a year ago, which was a weak quarter. Investment Banking was higher on both a linked-quarter and year ago basis, while equity markets fell 39% sequentially given some reversals of valuation adjustments related to prime brokerage financing transactions. Results were stronger from a year ago given weak equity markets performance in 4Q'14. Further, Citi disclosed that the impact of foreign exchange volatility also masked otherwise solid performance in Treasury & Trade Solutions and Securities Services as compared to a year ago.

In terms of credit quality, Citi reported flat corporate non-accrual balances, following a substantial increase in non-accrual loans last quarter given downgrades in its North America energy portfolio. Citi built loan loss reserves on institutional side primarily reflecting deterioration in its energy portfolio, with \\$75 million of NCOs in 4Q'15. The other half of the reserve build was for macro concerns. Citi did not disclose its reserves to energy loans.

Citi's energy funded exposure was \\$20.5 billion, representing around 3% of total loans, with 68% investment grade. Citi expects that credit costs in ICG will be around \\$600 million in the first half of 2016, based on a scenario in which oil prices remain around \\$30 a barrel for a sustained period of time. If oil were to drop to \\$25 a barrel for an extended period of time, then the cost of credit would double in Citi's estimation.

Consumer nonaccrual balanced declined 24% on a linked-quarter basis. Consolidated NCOs were ticked up 9bps to 2.10%. Loan losses in all three geographic segments: North America, Latin America, and Asia (which now includes EMEA's results) all reported increases, with the most notable deterioration in Latin America.

Fitch expects that the level of consumer loan loss reserves has stabilized, and earnings are likely not going to benefit from reserve releases going forward to the same extent as they have in the recent past.

Following the sale of OneMain and the retail banking businesses in Japan, Citi Holdings assets now comprise 4% of total assets at year-end 2015, and 11% of risk-weighted assets. Citi expects Citi Holdings to break-even or remain marginally profitable in 2016. This is aided by the 4Q'15 higher cost debt repurchases.

Citi's capital ratios continue to remain very good and generally above global peers. The company's estimated Common Equity Tier 1 under Basel III on a fully phased-in basis increased again to an estimated 12%. The approximate 30 bps improvement from last quarter was due primarily to retained earnings, lower risk-weighted assets, offset by share repurchases, a slight build in the DTA, and unrealized losses. With respect to Citi's estimated 3.5% G-SIB capital surcharge, Citi continues to work on making its balance sheet more efficient, with an internal buffer above that of between 50bps and 100bps.

Citi also reported that it would already be in compliance with the supplementary leverage ratio at the holding company with a 7.1% ratio, up 20bps from the prior quarter-end. Citi had less than \\$100 billion of non-operating deposits at the beginning of the year, and reduced this balance by \\$50 billion during the year.